Coal Prices and Earnings (updated November 23, 2005)

In the business week ended November 18 the Powder River Basin (PRB) average spot price continued to moderate, declining from $14.65 per short ton to $13.85 (see table and graph below). PRB spot prices rose rapidly from the week ended September 23 through the week ended October 28. So far, they are retreating less rapidly. Prices quoted apply to the 8,800-Btu PRB coal tracked by the Energy Information Administration (EIA), for prompt quarter delivery. There were no changes in spot prices in the other coalfields tracked. The 11,800-Btu Northern Appalachia (NAP) rail coal remained at $44.00 per short ton and Central Appalachia (CAP) remained at $62.00 per short ton. The Illinois Basin (ILB) spot price continues at $36.00 per short ton and the 11,700-Btu Uinta Basin (UIB) coal average spot price is still $37.00 per short ton (all for prompt-quarter delivery, Coal Outlook, November 21, p 2).

Average Weekly Coal Commodity Spot Prices Business Week Ended November 18, 2005

1 Coal prices shown are for a relatively high-Btu coal selected in each region, for delivery in the "prompt" quarter. The "prompt quarter" is the next calendar quarter, with quarters shifting forward after the 15th of the month preceding each quarter's end. Source: with permission, selected from listed prices in Platts Coal Outlook, "Weekly Price Survey." Note: the historical data file of spot prices is proprietary and cannot be released by EIA; see http://www.platts.com/Coal/. >Analytic Solutions>COALdat, or >Newsletters> Coal Outlook.

Market Developments (updated November 23, 2005)

PRB spot prices had been trending up all this year, reaching an all-time high in the week ended October 21. The low stockpiles of PRB coal at electric power generators and the all-time highs for sulfur dioxide emission allowances (recently rising above $1,300 per short ton) have helped drive PRB spot prices to their latest peak. Those elevated spot prices have reportedly led to 3- to 5-year contracts at prices higher than were negotiated in recent months. The fallback in PRB spot prices in the past several weeks may be related to rail capacity. There is a real limit to the amount of new coal-haul slots the Burlington Northern and Union Pacific railroads can add in 2006 and, during October, the Union Pacific reported a decline in shipments because of flooding in Kansas, three derailments (one of which affected all three Joint Line tracks), and some remaining effects of Hurricane Rita.

Arch Coal said on November 14 its West Elk mine would be off line for at least six more weeks due to an unexpected increase in detected combustion gases. Previously, the company had estimated a shorter outage. One analyst estimates that Arch will have lost 1.1 million tons of coal production from the West Elk outage by the end of this year. CONSOL Energy said, also on November 14, that repairs at the Buchanan mine will not be completed until mid to late December, rather than mid November as originally thought. The skip hoist damage of September 16 will require full replacement instead of repairs only (Legg-Mason, Mining advisory, November 15). Buchanan normally produces 350,000 to 400,000 short tons per month of low volatile metallurgical coal. This is the second time this year that the mine is out of commission; "no meaningful inventories" were available from Buchanan at the time of the mishap (Coal Trader, October 28, p 4).

Lower current coal demand in Europe has given South American and, now, Russian low-sulfur coal producers incentives to offer more coal and competitive prices for the U.S. import market (U.S. Coal Review, November 7, p 4; Coal Outlook, November 14, p 8). Russian producers are offering coal at a delivered price of about $60 per metric tonne CIF US and some sales reportedly have been made. Platts assessed a sample of Russian coal as 11,500 Btu per pound, 1 percent sulfur, and 16 percent ash.

Coal buyers and sellers have expected prices to remain elevated because coal supplies and coal consumer inventories are tight at the same time as coal demand is increasing, and both the tight coal supplies and inventories, and the increasing demand are expected to persist. Recent fluctuations in PRB prices are related to high sulfur dioxide emission allowance prices, although some analysts feel that the allowance prices have risen even higher than PRB fluctutations would imply, partly driven by hedged transactions. Also, PRB coal is the largest coal supply alternative to the recent high costs of natural gas generation. The declines in PRB coal prices since late October may reflect a reduction in new activity as the year winds down. PRB deliveries in 2005 fell well short of expectations. Physical limitations augur that the railroads cannot ship enough PRB coal going forward to restore adequate coal inventories before the end of 2007 and spot prices may be readjusting to the fact that future production is being locked into multi-year contracts at prices favored by coal producers and with escalation clauses.

Since coal supply growth will come from a mix of reopened old mines, changes in ownership and new operating standards, and the financing and permitting new mines, that growth will develop largely over the next 2 or 3 years. Coal demand is likely to remain high as long as natural gas prices remain above $6.00 per thousand cubic feet (Blaney, J, Implications of New Air Regulations for Coal Markets at Platts Coal Marketing Days, September 26, 2005). On the other hand, developments such as additional coal imports and the reopening of previously permitted mines may push down spot prices from time to time.

After mid-October rumors that the Pinnacle mine encountered a rock offset at the longwall face had coke producers searching for low-volatile metallurgical coal, a company official said on November 8 that low roof area had reduced production to 80 percent of capacity. The longwall plow is expected to have mined through the rock intrusion after only two or three shield, which meant that mining should be through it “pretty soon.” The official said that shipments had not been delayed and that stockpiles were sufficient to sell off some end-of-year “opportunity tons” (U.S. Coal Review, November 14, p 18).

CONSOL Energy said on November 14 that repairs at the Buchanan mine will not be completed until mid to late December, rather than mid November as originally thought. The skip hoist damage of September 16 will require full replacement instead of repairs only (Legg-Mason, Mining advisory, November 15). The skip hoist lifts the coal 1,780 feet from underground to the surface, equal to the height of a 148-story building. Buchanan, which normally produces 350,000 to 400,000 short tons per month of low volatile metallurgical coal, has invoked force majeure provisions while the mine is idle (U.S. Coal Review, November 21, p 3). This is the second time this year that the mine is out of commission; "no meaningful inventories" were available from Buchanan at the time the mine was idled (Coal Trader, October 28, p 4).

Jim Walter Resources in Alabama is planning to shift 1.8 mmst of Blue Creek seam production in 2006 from steam markets to metallurgical. The coal is from its No. 7 mine but the steam coal will be replaced in part with production from surface-minable reserves. The company sold met coal at an average of $75 per short ton in 1H2005 but was able to sell its production in 2H2005 for $104 per short ton. Its projections for 1H2006 are to sell 3 mmst at an average of $105 per short ton (SNL Coal Report, October 24, pp 5,6). Meanwhile, some spot purchases of NAP medium-quality, high volatile met coal were sold for $85 per short ton and multi-year contracts have been done for $85, and for $87 per short ton for higher-quality met coal (U.S. Coal Review, October 24, p 5).

In international markets metallurgical coal demand expectations are varied and mixed. The core issue is that 2005 domestic steel production in China has been well above projections, resulting in a glut of steel despite China’s current position as the world’s largest consumer of steel. China’s largest steel producer, Baosteel cut prices by at least 10 percent November 22, after cutting prices by 15 percent in August (Financial Times (FT.com), November 22). As noted in the Transportation section (below), Chinese steel producers have been drawing down iron ore supplies. It appears the same is true of metallurgical coke. To deal with slow domestic sales of met coke, producers in China were reported offering coke for $130 per metric tonne at Chinese ports (U.S. Coal Review, November 21, p 5). Prices in that range for coke, if they persist in steady volumes, would deter further sales of metallurgical coal above $100 per tonne ($90-$91 per short ton). Much depends on location and timing. Some producers, especially those with new contracts, are confident that demand will remain high over the next several years, just not greater than $100 per short ton.

Potential new coal demand is expected in industrial and combined heat and power applications and, with oil prices high, eventually in planned coal-to-liquid fuel plants. Morgan Stanley energy analysts Mark Liinamaa and Wayne Atwell noted that the surge in PRB prices may in turn support higher prices in other coal fields. "Until recently, PRB prices have been acting as a point of relief for high eastern prices. Recent PRB prices moves add support for the Northern Appalachia/scrubber case, longer-term increase in demand for Illinois Basin coals, as well as continued strength in Central Appalachian pricing. . ." (Coal Outlook, October 17, pp. 13-14).

Summer coal inventories at electricity generating plants generally reach their low point in August or September each year. In 2005 that low point was in September, which ended with 98.1 mmst, or 33 days' supply (see graph below). That was slightly above the winter low point of 97.9-mmst this past January, also a 33-day supply. In terms of number of days’ consumption though, the summer low point occurred in August, which fell to 31 days’ of coal. Even though September coal inventories were 1.4 percent lower, the days’-supply low point occurred in August because the rate of coal consumption in August was 9.9 percent higher than in September.

Trade reports in August estimated that coal-fired generator stocks had reached 30 days' supply on average (which was close), and around 10 days' supply in isolated cases. Stockpiles usually decline through September. This year they were expected to have declined more than usual based on above-normal cooling degree-days and high power generation rates. During the shoulder months of October and November, power producers rebuild coal inventories as much as possible. The ongoing need to replenish inventories is expected to keep spot and new contract prices firm through at least 2006.

As of close of business November 22, the last settled price for 2005 sulfur dioxide allowances reached $ 1,350 per ton, another record high. (Evolution Markets, November 22). Prices have risen rapidly - as recently as October 27, Evolution Markets reported settled transactions only as high as $1050 per ton for 2005 sulfur dioxide allowances. There were no settled allowance prices for 2006, but the offer and bid prices were very close to those for 2005 - $2.00 to $5.00 lower. High allowance prices and the near-term need for coal can be mutually reinforcing to some extent. As a result, there have been recent distressed spot purchases of low-sulfur coal at elevated prices and of high-sulfur coal at lower prices along with high-priced sulfur dioxide emission allowances.

After unusual growth in coal exports in 2004 (5.0 mmst over 2003), 1Q2005 exports were ahead of 1Q2004, but that pattern reversed in 2Q2005. (EIA, Quarterly Coal Report, Table 1, September 19). As a result, exports year to date at the end of June were nearly the same as in the same period of 2004: 24.93 versus 24.94 mmst. U.S. coal exports continue to be led by metallurgical coal, but the year-to-date totals are also very similar for met coal (15.25 versus 15.21 mmst in 2004) and for steam coal exports (9.68 versus 9.73 mmst in 2004). On the other hand, coal imports are up appreciably for the first 6 months of 2005: 14.84 versus 12.18 mmst in 1H2004, an increase of 21.8 percent.

The graph below, and its downloadable data file include data available through September 2005. They show quarterly average values based on coal cost data EIA collects from coke plants. It also depicts monthly average values declared for met coal brought to ocean terminals for export, from U.S. Customs data. The values reported include the costs of transporting the coal to the coke plants or export districts. Unlike most prices reported in coal newsletters, the values below are based on surveys of actual shipments. These prices are about 2 months old, however, when they are first available and do not address future prices. Because the prices below are averaged and include met coal shipments from multi-year contracts, traditional 12-month contracts, and not just spot shipments, variances are less extreme than in some spot price reports.

Click here to download Met Coal data files. (Excel Format)

Coal Production (updated November 14, 2005)

Estimated monthly coal production for October 2005 was 91.2 mmst (see graph below). The October EIA estimate amounts to a 2.5 percent, or 2.3 mmst, decline from September’s 93.5 mmst. The October production estimate is 1.6 mmst lower than the October 2004 production, but year to date production maintains a 9.2 mmst, 0.9 percent, lead over January through October 2004. Through the end of June the year-over-year difference resulted from 4.3 mmst greater production west of the Mississippi and, notably, 5.5 mmst greater production east of the Mississippi. The rise in production east of the Mississippi resulted primarily from EIA revisions to its 2Q2005 estimates, based on second-quarter mine-level survey data and on growing estimated production in Appalachia in August and September.

The U.S. Monthly Coal Production graph (below) includes production based on final mine-level reports for 2004 by the Mine Safety and Health Administration (MSHA), and revisions to EIA estimates based on initial MSHA mine-level surveys for 1Q2005 and 2Q2005. The revised coal production for the first two quarters of 2005 was 562.1 mmst, based on completed MSHA data. That is 12.4 mmst, or 2.3 percent, more than in the first two quarters of 2004.

Note: This graph is based on MSHA-based revisions for all quarters of 2004, for the first and second quarters of 2005, and on preliminary EIA production estimates through October 2005.

Transportation (updated November 16, 2005)

The Dakota, Minnesota & Eastern Railroad (DM&E), along with its sister railroad, the Iowa, Chicago & Eastern, applied for a $2.5 billion loan from the Federal Railroad Administration to build a third railroad into the Powder River Basin. The loan would virtually guarantee the fruition of the DM&E’s years of effort, which started in 1998. Construction on the 3-year project could start in late 2006 if the loan is approved, according to Kevin Schieffer, president and CEO of Cedar American Rail Holdings Inc orporated, which owns both railroads . DM&E expects to haul 100 mmst of PRB coal per year when the line is built. In April, the Surface Transportation Board reaffirmed its approval of the DM&E project to build a third PRB line. DM&E is filing for the loan under a provision authored by Senator John Thune, R-SD, that was part of the $286 billion Transportation Reauthorization bill enacted earlier this year. Senator Thune stated that “This project could transform South Dakota’s economy for generations” (Coal Outlook, November 14, pp 10-11).

Keystone Industries LLC announced plans to build a new dry bulk import terminal in Jacksonville, Florida. The goal is to import as much as 6 mmst of Venezuelan coal per year. The purchase of the site is scheduled for February 2006. Plans call for one Panamax-capable berth to be operating 18 to 24 months later, and a second berth could be added if warranted. Plans include a rail loop capable of loading 100-car unit trains. Rail carriers include Norfolk Southern, CSX, and Florida East Coast Railroad. The terminal would handle coal, petroleum coke, and possibly other commodities (SNL Coal Report, October 24, p 11).

Burlington Northern Santa Fe (BNSF) will convert its fuel surcharges for coal and agricultural hauls to a mileage basis on Janurary 1, 2006. BNSF executive John Lanigan characterized the new program as “more fair and equitable than the current percentage-based program (U.S. Coal Review, October 24, p 18).

In testimony at the October 19 hearing to review the 1980 Staggers Act, the Surface Transportation Board (STB) heard strong complaints from groups representing captive shippers. Many electric coops are captive to a single rail provider and “have unreasonably high rates and non-negotiable terms of service dictated to them on a ‘take-it-or-leave-it’ basis,” according to Glenn English, CEO of the National Rural Electric Cooperative Association. Mr. English said that better rail service and greater capacity should not “be accomplished on the backs of captive rail shippers.” Calling STB’s “rate reasonableness” review procedure arbitrary and prohibitively expensive to shippers, Mr. English concluded, “ Our membership asks in the strongest possible terms that the board take corrective action to implement the clearly expressed intent of Congress that mandated protections against monopoly power and transportation rate fairness. . .” The statement of the Alliance for Competition said implementation of the Staggers Act “has resulted in less competition due to Class I mergers and regulatory approval of paper barriers neutralizing the ability of smaller railroads to compete with the Class I railroads . . .”(SNL Coal Report, October 24, pp 12, 13).

The view of the rail industry, enunciated in the Association of American Railroad’s (AAR) September 2005 position paper, “Destructive Railroad Deregulation,” states that calls like those above for changes to the Staggers Act would lead to less competition and higher rates. For example, the AAR asserts that the railroads’ use of “’differential pricing’. . . is the fairest, most-pro-efficiency, and most pro-competitive pricing system consistent with the continued viability of freight railroads. All shippers, including those who pay a higher markup, benefit from the differential pricing because it maximizes the number of shippers who contribute to railroads’ huge fixed and common costs.” The AAR concludes that, because of railroads’ enormous infrastructure costs, “If shippers with the greatest demand for rail service paid less because of regulation . . . costs would not be covered, and private capital would flee the industry,” with the result that taxpayers would eventually have to make up the revenue shortfall.

With the cooling of growth in the Chinese steel industry earlier this year, ocean bulk carrier rates declined. In August, however, China’s crude steel output hit a new record, up by 30 percent year-on-year to 30.5 million (Metric) tonnes. In September, the crude steel output nearly matched the record high, reaching 30.4 million tonnes. These compare with 29.2 million tonnes in July and correspond with intentional drawdowns of iron ore stockpiles (Simpson, Spence & Young, October 19, Website News). The use of iron ore stocks meant that China’s demand for bulk carriers had not yet affected rates. Logically, however, that ore would need to be replaced in 2006. Further, European steel prices have increased slightly in the second half of 2006 after most large steel companies cut production. U.S. steel prices are currently the highest in the world, but increased ocean shipments of low-cost steel from Asia are expected to reach the United States in coming months (Business Day, November 21).

Indeed, international ocean shipping rates have begun to rise. Since July 30, when coal shipping rates from U.S. Gulf ports to the ARA (Amsterdam/Rotterdam/Antwerp) European gateway reached $11 per tonne, they had risen to nearly $17.00 by October 7. Similarly, averaged rates from Hampton Roads to Japan, via 150,000-tonne Capesize vessels, having fallen to $22.50 in late July, rebounded to $36 per tonne by October 7 (Simpson, Spence & Young, Resources, Free Charts, accessed November 1). International demand for metallurgical coal has also risen since a mid-summer lull, and Indian steam coal demand continues to grow. The recent permanent shutdown of the U.S. Steel No. 3 coke battery at the Gary facility and the shortage of U.S. low-volatility met coal have U.S. steel producers looking for coke supplies. Chinese coke batteries have meanwhile been producing excess coke again and have lowered prices by $100 cumulatively in 2005. Non-premium Chinese coke was recently available for $125 per tonne, f.o.b. dockside. Even with ocean shipping costs, coke at that price is less expensive currently than domestic coke, according to some U.S. buyers, and may spur more coke imports by U.S. customers (U.S. Coal Review, October 24, pp 5, 15).

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Rich Bonskowski
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e-mail: Richard Bonskowski

Bill Watson
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e-mail: William Watson